PacWest Bancorp and Western Alliance Bancorp led a significant selloff in regional lenders amid renewed fears over the US financial system's health following the second-largest bank failure in history. Both firms experienced trading volatility halts as PacWest's shares fell by 42% and Western Alliance's by 27%. The KBW Regional Banking Index dropped by 7%, marking the most significant decline since the Silicon Valley Bank crisis in March.
Investors are concerned about which bank could require a rescue next, causing regional bank stocks to remain vulnerable until there are clear signs that emergency lending programs can be discontinued. Western Alliance and PacWest are among several regional banks scrutinized by investors after the collapse of Silvergate Capital Corp., SVB Financial Group's Silicon Valley Bank, and Signature Bank in March.
Many regional bank investors had anticipated the Federal Deposit Insurance Corp. (FDIC) would announce changes to deposit insurance alongside its statements about the First Republic receivership process. The level of uninsured deposits at Silicon Valley Bank and Signature played a crucial role in the bank runs leading to their downfall. However, no clear changes to deposit insurance have been announced, contributing to further pressure on bank shares.
While individual factors have contributed to the recent collapse of regional lenders, their troubles can be traced back to higher interest rates, raising their funding costs while eroding asset values. As deposits have left the system for higher-returning vehicles like money-market funds, banks have relied on liquidity provided by the Federal Reserve and the Federal Home Loan Bank system. However, the high funding cost is set to impact profitability.
